Govt revenue safe under 2-tier cigarette tax


An economics professor said the existing two-tier excise tax system for cigarettes must be maintained to preserve the government’s revenue collection.

University of the Philippines (UP)-Manila economics professor Dr. Ernesto Gonzales said there is a need to modify the unitary tax system into a two-tier approach to preserve revenues derived from low-income consumers who constitute the bulk of cigarette consumption.

Under the Sin Tax Reform Act, the two-tier tax system—intended as a transitional measure—shall eventually converge to a unitary rate of P30 per pack by January 1, 2017.

Gonzales noted the concept of price elasticity where the rich sector of society is less responsive to price increases than low-income consumers.

“A unitary system is inequitable because it essentially makes the poor or low-income sector devote a higher percentage of their income to paying the tobacco tax than higher-income individuals who can actually afford to do so,” he said.

“Besides, a unitary system impedes on consumers’ freedom to choose a product that suits his level of income,” Dr. Gonzales argued.

Gonzales also stressed that the demand for cigarettes is omnipresent and one of the easiest ways for a government to drive in revenues is to “fine” smokers by way of taxation.

Meanwhile, a study by Dr. Dahlia Remler, a health economics expert at the Harvard University, said cigarette taxes have been found to be regressive for two reasons.

First, sales tax is generally regressive because the rich save and invest a large portion of their income than the poor, and so the poor spend a larger share of their income on consumption.

Second, since the prevalence of smoking is higher among the poor, cigarettes are in fact disproportionately consumed by the poor.

The two-tier approach will lessen the impact of the regressive tax as it tends to approximate the tax imposable to taxpayers based on their respective income levels.

Earlier last week, the House Committee on Ways and Means approved House Bill (HB) 4144, filed by Representative Eugene Michael de Vera of ABS party-list, proposing a P32 tax rate per pack for cigarettes priced at P11.50 and below and P36 per pack for cigarettes with a net retail price of above P11.50.

This bill seeks to amend Section 145 (C) Sin Tax Reform Law passed in 2012 which provided for a move toward a unitary excise tax rate system for cigarettes by the year 2017 and indexed the tax rate to inflation by increasing it by 4 percent annually.

The bill said it seeks to address a serious concern to protect the welfare of tobacco farmers by maintaining the current excise tax system on cigarettes packed by machine at two tiers instead of shifting to a unitary excise tax rate.

This bill earned strong opposition from farmers, tobacco manufacturers, and nongovernmental organizations and health groups.

The Department of Finance urged the congressional oversight committee on the Sin Tax Reform Act to start reviewing the revenue and health impact of the tax rates mandated under the law to determine what measures should be undertaken by the Legislature once the statute matures in 2017.


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